It is a well-established fact that strong government regulations stimulate economic growth. But countries with complicated set of regulations and lax enforcement of regulatory measures cannot attract domestic and foreign investment, and hence compromise on their growth potential. Therefore, it is critical to carefully introduce and execute business reforms to harness the growth potential of any country.
Empirical evidence shows that productivity growth – the decisive driver of economic growth – has been held back by onerous regulations, which slowdowns the growth of firms. Pakistan’s fragmented industrial production structure is not an outcome of market forces, rather a result of burdensome government regulations which restricts the growth of firms. Thus, conducive business environment is necessary for realizing higher economic growth.
With the growing number of small and medium enterprises (SMEs) attempting to join the industrial sector, ease-of-doing-business (EoDB) plays a decisive role. Driving new business opportunities forward therefore needs EoDB more than anything else. To start a business, an investor has to go through a number of procedures that are time consuming and costly to implement. They generally include the following:
Registering Property and Obtaining Construction Permits. Startup businesses have to obtain construction permits and track their procedures which is often time consuming (260+ days). It costs to obtain licenses and permits, submit required notifications, and request and receive necessary inspections. In addition, startups have to fulfill different requirements for building quality control, safety mechanisms, and insurance and professional certification requirements.
Obtaining Utility Connections. A newly constructed warehouse has to obtain different utility connections, which include many procedures. Afterwards, the investor has to face unreliable supplies and unpredicted changes in the prices of utilities.
Getting Credit. Smooth availability of credit to investors involves the strength of the credit reporting systems and the effectiveness of collateral and bankruptcy laws.
Protecting Minority Investors. Minority shareholders confront the misuse of corporate assets by company directors for their personal gain. Safeguard measures and corporate transparency rules reduce the risk of abuse against minority shareholders.
Payment of Taxes. It comprises administrative burden of paying taxes and contributions, and complying with post filing procedures (refunds and tax audit).
Doing International Trade. It includes time and costs associated with the logistical process (documentary compliance, border compliance and domestic transport) of exporting and importing goods (excluding tariffs).
Enforcing Contracts. It is time consuming and the investor has to face the brunt of resolving commercial disputes through local courts and the quality of judicial processes.
Resolving Insolvency. It involves the outcome of insolvency proceedings involving domestic legal entities.
When rules and regulations are efficient and business-friendly, starting a business is easier. Thus, creation of an open and fair business environment – EoDB – benefits firms in many different ways, including:
Access to Economic Opportunities. Large-scale firms easily deal with the bureaucracy to set up their businesses. They usually have access to the means and personnel, or third party agencies to process all the paperwork, payments, registrations, etc., their startup process is usually completed fairly quickly and without much stress. However, SMEs often face red-tapism that works like obstacles and ultimately inhibits them from growing in a timely manner.
Lower Transaction Cost. Transaction costs form a major part of the total cost of establishing firms. While large-scale firms take on the transaction costs of setting up their businesses either through their own financial resources or easy access to financial capital market, fewer steps to set up a business with lower red-tapism can help SMEs to efficiently manage their financial resources and credit. They also help them to better manage their post-startup operations and management of actual businesses.
Less Corruption. More stringent regulatory environment for setting up businesses is often a source of corruption, which in turn encourages informality in the economy. But this transformation adds to the cost-of-doing business. Lengthy procedures deliberately created in the systems also create corruption. Therefore, simplifying the setup process, especially for SMEs, can greatly benefit them.
Businesses often complain about government regulations and their restrictive impact on doing business. Regulations are considered as an impediment to firms’ profits and a waste of precious time and effort. Statutory requirements are denounced by businesses; consequently, they are side-stepped and frequently violated by them.
State of EoDB in Pakistan
The EoDB-score developed by the World Bank captures the gap of each economy from the best regulatory performance observed on each of the indicators across all economies in the Doing Business sample survey. Pakistan scored 55.31 in 2019 (for more details see Table 1). A regional comparison suggests that China scored 73.64 followed by India (67.23) and Bangladesh (41.97).
An economy’s EoDB ranking ranges from 1 to 190. This index is based on the perception of business community about the business environment in the country. Pakistan has climbed 11 spots from a year ago to rank at 136 in 2018 from 147 in 2017. The EoDB averaged 118 from 2008 until 2018, reaching an all-time high of 148 in 2015 and a record low of 85 in 2009.
The Board of Investment (BOI), in coordination with other institutions, has introduced a number of reform measures to improve Pakistan’s EoDB position in the world ranking. The reforms under focus are business registration, licenses, permits, fees, taxes and issuing of no-objection certificates (NOCs).
Securities and Exchange Commission of Pakistan (SECP) has established a business registration portal, which is connected with provincial authorities and other federal agencies. As a result, a company can now register itself in four hours that was earlier completed in 16.5 days. The SECP has registered more than 8,000 companies in the first half of 2019 after the introduction of registration portal. The improvement in starting a business is widely recognised by foreign companies working in Pakistan.
Previously, businesses in Pakistan had to pay about 47 different federal and provincial taxes, and levies that have been cut down to 16 in December 2018. Government plans to further cut it down to 10 payments and ultimately to a single payment.
A key reform has been introduced by introducing ‘automated property registration’ through online mode. Consequently, in Karachi it now takes 14 days to register a property instead of 208 days, and in Lahore it is reduced to 15 days from 26 days.
Lahore Development Authority (LDA) has introduced one-window operation where all of the departments involved in the process of issuing construction permits and NOCs are located. Consequently, it now takes 52 days rather than 266 days to obtain construction permit. In Karachi’s case it now takes 90 days instead of 260 days to obtain a construction permit.
Besides, Web-based One Customs (WeBOC) has been introduced to help importers/exporters save time and cost of compliance. Importing and exporting has been made easier by developing a new container terminal and enhancing its customs platform for electronic document submission.
K-Electric has streamlined the process of acquiring commercial electricity connection by making it online where customers can track their applications.
Pakistan has increased minority investor protections by making it easier to sue directors in case of prejudicial transactions with interested parties.
The government is planning to establish a collateral registry to assist SMEs where they can use their moveable assets as collateral for getting credit from banks.
More is Needed
Despite the above Mentioned reform measures recently introduced, the government still has to eliminate redundant regulatory steps and unnecessary permissions/NOCs, and inspections to cut the red tape hurdles. Unless all the ministries and line-departments make effort to follow the reform process in letter and spirit this uphill task is not easily achievable. This is particularly true for the provincial governments who have assumed bigger responsibility after the 18th Amendment of the Constitution and are not doing much in this regard.
The BOI itself needs massive restructuring, reforms and change in management style to cope with the new culture of EoDB. Basically, the BOI needs to play the role of an investment facilitator and not a regulator. Of course, the BOI has lately attempted to improve doing business in coordination with provincial BOIs. But the main hindrance is that these boards have weak capacity or know-how to execute reform measures, which act as a deterrent to EoDB. Therefore, to bring around a meaningful result on ground in EoDB, BOIs have to reform themselves first. Besides, these boards need to build up their capacity and knowledge to effectively implement the reform measures. Thus, an improvement in institutional competence is indispensable to address this widespread issue.
There is a need for amendment in the insolvency and bankruptcy codes to prevent wilful defaulters from buying up any of their own troubled assets at discounted rates. This amendment would strengthen access to credit, as secured creditors will receive priority over other claims within insolvency proceedings.
The complex tax structure for the payment of taxes should be simplified. Moreover, with regard to cross-border trading there is an urgent need to improve efficiency and to reduce the time taken to meet the compliance requirements.
Generally, the bureaucracy is currently in the lethargic mode and is reportedly indecisive. This is the core issue choking the economic activities, which needs immediate attention.
The Bottom Line
The 10 top economies in the EoDB ranking share common features of regulatory efficiency and quality, including mandatory inspections during construction, automated tools used by distribution utilities to restore service during power outages, strong safeguard measures available to creditors in insolvency proceedings, and automated specialized commercial courts. Pakistan needs to benchmark and emulate these top economies to attract foreign investors, and revive their confidence to invest especially in country’s Special Economic Zones under CPEC.
The writer is a Professor of Economics at the School of Social Sciences and Humanities at NUST, Islamabad.
E-mail: [email protected]
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